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Hideo Tamura

【#1392】Takaichi Should Steadily Implement Tax Cut and Growth Strategy

Hideo Tamura ／ 2026.08.05 (Wed)


August 3, 2026

　
On July 30, Prime Minister Sanae Takaichi announced her plan to lower the consumption tax on food products from 8% to 1% for two years from next April. This will be the first cut in the consumption tax in Japan since its introduction in April 1989. Although the plan meets her Liberal Democratic Party’s campaign promise for a House of Representatives election earlier this year, opposition to the plan has erupted even within the ruling party. Major national newspapers are also persistently criticizing the plan in editorials and commentaries. One of the main shared reasons cited against the plan is that consumption tax revenue as financial resources for social security benefits will decrease by about 4 trillion yen. However, this is nothing more than a simplistic, grade‑school level calculation that ignores economic dynamism.

Tax revenue increases as the economy grows

Financial resources for social security consist of social insurance premiums and tax revenue, with consumption tax revenue forming only one part of it. Japan’s national general account tax revenue for fiscal 2025 totaled 84.2 trillion yen, including 26 trillion yen in consumption tax revenue. Social security benefit costs increase by more than 2 trillion yen annually. Tax revenue for fiscal 2025 increased by 12% or 9 trillion yen from the previous year. Although this pace may not necessarily continue in the future, what is certain is that if nominal gross domestic product (GDP) grows, tax revenue will increase at a much faster pace.

In fiscal 2020 when the COVID-19 was widespread, the then Shinzo Abe administration launched a large-scale fiscal stimulus worth more than 100 trillion yen, leading to an economic expansion trend. Between fiscal 2020 and 2025, nominal GDP grew at an average annual rate of 3.2%, while tax revenue increased at an average annual rate of 5.6%.

In contrast, between fiscal 1997 and 2019, average annual growth was limited to 0.1% for nominal GDP and 0.3% for tax revenue. As a result of no fewer than three major consumption tax hikes during those 22 years, consumption tax revenue certainly increased. However, overall tax revenue stagnated as corporation and income tax revenue plunged amid chronic deflation. Fiscal health deteriorated, and government debt continued to expand. Nevertheless, some within the LDP and most of the media refuse to learn lessons from the failed tax hikes.

Resistance from fiscal hawks

Before announcing the consumption tax cut plan, the Takaichi administration adopted this year’s Basic Policy on Economic and Fiscal Management and Reform (the “Basic Policy”) that lifted a target year for achieving a primary budget surplus to limit policy spending to within tax revenue and called for promoting investment in 17 strategic areas. This domestic investment is the top‑priority measure for countering China’s bid for supremacy in fields such as artificial intelligence, quantum technology, and advanced semiconductors, and it will lead to a strengthened Japan–U.S. partnership.

However, fiscal hawks stand in the way here as well. Major economic media have been stirring up fiscal anxiety on an almost daily basis, fueling speculative yen selling. If investors in the world are convinced that the Takaichi’s growth strategy is genuine, the tide of the market will change. The prime minister need only approve a consumption tax reduction bill in a calm, orderly manner and steadily implement her medium- to long-term growth strategy.

Hideo Tamura is a Planning Committee member at the Japan Institute for National Fundamentals and a columnist for the Sankei Shimbun newspaper.